This Is So Depressing

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and “The Coming Collapse of the Municipal Bond Market” (, 2009)

  “Easing of Mortgage Curb Weighed,” July 23, 2013, Wall Street Journal

“Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis. The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation. The plan, which hasn’t been finalized and could still change, would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago…. ‘My sense is that Washington has lost its political will for serious reform of the securitization market,’ said Sheila Bair, who served as FDIC chairman until 2011.

“In addition to the Fed and the FDIC, other agencies involved in drafting the rules include the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Department of Housing and Urban Development, and the Federal Housing Finance Agency.

“Americans Gambling on Rates With Most ARMs Since 2008,” July 24, 2013, Bloomberg,

“Jung Lim plans to offset the cost of rising mortgage rates by using an adjustable-rate loan to buy a home for his expanding family….Lim, 38, whose wife is expecting a second child in December, is leaving a two-bedroom condo in Los Angeles’s Hancock Park to buy a four-bedroom house in the city’s Sherman Oaks neighborhood for $1.12 million. His lender offered him a rate for an adjustable mortgage that is about a percentage point cheaper than a fixed loan.

“In the second year of the U.S. housing recovery, the loans that helped trigger the housing bust are making a comeback. Applications in late June rose to the highest level since 2008 after the Federal Reserve sent fixed rates surging by signaling it may curtail bond buying credited with pushing borrowing costs to the cheapest on record. The average 30-year fixed-rate mortgage jumped 1.2 percentage points in mid-July from May to the highest level in two years, adding about $200 a month to payments on a $300,000 mortgage.

 “‘When you give unqualified buyers a rate they won’t be able to afford based solely on the presumption that home prices will always go up, it’s not going to end well,’ said Keith Gumbinger, vice president of, a Riverdale, New Jersey-based mortgage website.”

“A Hands-Off Policy on Mortgage Loans,” July 14, 2005 by Edmund L. Andrews, New York Times

“For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans…. First they issued new ‘guidance’ to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest only [mortgages] and ‘liar’s loans’ that require no proof of a borrower’s income. The impact so far? Almost nil.”

“Loose Reins on Galloping Loans,” July 15, 2005 by Edmund L. Andrews, New York Times

It has become easier “to get these loans than…two months ago.” Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation [FDIC] explained: “We don’t want to stifle financial innovation. We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation.”

 “Housing Boom Echoes in All Corners of the City,” August 4, 2005, by Jennifer Steinhauer, New York Times

“[N]ew homes are going up faster now than they have in more than 30 years….Large tracts of Queens, once home to factories and power plants, are being readied for apartment complexes.”

Christopher Wood, October 2005, CLSA, Greed & fear

“[T]he Office of Inspector General of the Department of Housing & Urban Development reported to Congress in October 2004 that it had 450 open criminal single-family investigations related to fraud claims covered by federal mortgage insurance, while arrests have increased by 800% over the past four years.”

Wood: “Wall Street is now encumbered with layers of compliance clutter…. As the obsessive focus has grown on ‘insider traders’ and the like, it remains ludicrous that there is so little regulatory focus on sales practices in residential property.”

L.A. Times Housing Blog, under a story about California house prices being down 35% year-over-year, June 8, 2008

“I’m loving all this. I sold a bunch of idiots big, big, ARM’s. I knew exactly how to appeal to their big ego’s. Got big commissions and have no guilt. Many losers I got loans for are now losing their houses. Ask me baby, do I care! Hey, I just wanna fill my bag, screw you.” Posted by: Cheri Ratino

“In Reversal, Fed Approves Plan to Curb Risky Lending,” December 19, 2007, by Edmund L. Andrews, New York Times

The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with weak credit. The new rules would force mortgage companies to show that customers can realistically afford their mortgages. They would also require lenders to disclose the hidden sales fees often rolled into interest payments, and they would prohibit certain types of advertising. Borrowers would be able to sue their lenders if they violated the new rules, though home buyers would be allowed to seek only a limited amount in compensation. “Unfair and deceptive acts and practices hurt not just borrowers and their families,” said Ben S. Bernanke, chairman of the Federal Reserve, “but entire communities, and, indeed, the economy as a whole.”

“A Crisis Long Foretold,” December 17, 2007, Editorial, New York Times,

 “An article in The Times on Tuesday by Edmund L. Andrews leaves no doubt that the twin crises of the subprime lending mess – mass foreclosures at one end of the economic scale and a credit squeeze afflicting the financial system – are rooted in the willful failure of federal regulators to heed numerous warnings. The Federal Reserve is especially blameworthy. Starting as early as 2000, former Fed Chairman Alan Greenspan brushed aside warnings from another Fed governor, Edward M. Gramlich, about subprime lenders who were luring borrowers into risky loans. Mr. Greenspan’s insistence, to this day, that the Fed did not have the power to rein in such lending is nonsense. In 1994, Congress passed a law requiring the Fed to regulate all mortgage lending. The language is crystal clear: the Fed “by regulation or order, shall prohibit acts or practices in connection with A) mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of this section; and B) refinancing of mortgage loans that the board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.” Yet, the Fed did nothing as junk lending proliferated – including loans that were unsustainable unless house prices rose in perpetuity, riddled with hidden fees and made to borrowers who could not repay. Mr. Greenspan has said that the law was too vague about the meaning of “unfair” and “deceptive” to warrant action.

“The Fed has also disappointed since the current chairman, Ben Bernanke, took over in early 2006. It was not until the end of June 2007 – after the damage was done – that the Fed and other federal regulators issued official subprime guidance. On Tuesday, the Fed issued another set of proposals…. [T]he proposal is weaker than earlier Fed guidance.

“The Office of the Comptroller of the Currency, for example, blocked states from investigating local affiliates of national banks for abusive lending. If the regulators had done their jobs, there might have been no lending boom and no extraordinary riches for the lenders and investors who profited from unfettered subprime lending. Neither would there be mass foreclosures, a credit crunch and a looming recession. This crisis didn’t appear unexpectedly. And it won’t go quickly away. Congress and the next administration will have a lot of work ahead to clean up the subprime mess – once and for all.”

Ben S. Bernanke, November 1, 2006 “Community Development Financial Institutions: Promoting Economic Growth and Opportunity,” At the Opportunity Finance Network’s Annual Conference, Washington, D.C.:

 “In 1994, fewer than 5 percent of mortgage originations were in the subprime market, but by 2005 about 20 percent of new mortgage loans were subprime…. [T]he expansion of subprime lending has contributed importantly to the substantial increase in the overall use of mortgage credit. From 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income quintile, the share of households with mortgage debt rose 53 percent.”

Ben S. Bernanke, May 17, 2007 “The Subprime Mortgage Meltdown,” at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois:

“[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

Ben S. Bernanke, April 4, 2013, “Financial and Economic Education,” at the 13th Annual Redefining Investment Strategy Education (Rise) Forum, Dayton, Ohio (via video)

“Hello. I’m Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System…. Among the lessons of the recent financial crisis is the need for virtually everyone – both young and old – to acquire a basic knowledge of finance and economics.”

 Ben S. Bernanke, May 10, 2013, “Monitoring the Financial System,” at the 49th Annual conference on Bank Structure and Competition sponsored by the federal Reserve Bank of Chicago, Chicago, Illinois

“Not since the Great Depression have we seen such extensive changes in financial regulation as those codified in the Dodd-Frank Wall Street Reform…” 

“The step-up in our monitoring is motivated importantly by a shift in financial regulation and supervision toward a more macroprudential, or systemic, approach…”

“Ongoing monitoring of the financial system is vital to the macroprudential approach to regulation. Systemic risks can only be defused if they are first identified. That said, it is reasonable to ask whether systemic risks can in fact be reliably identified in advance; after all, neither the Federal Reserve nor economists in general predicted the past crisis.”

Then get rid of Bernanke and the rest of the economists! Every taxi driver, florist, and zen counselor saw years in advance the biggest, best advertised, most anticipated, bubble to burst in the history of the world.

Ben S. Bernanke, Testimony Before the Financial Crisis Inquiry Commission, November 17, 2009 ***CONFIDENTIAL*** (Don’t tell a soul.)

CHAIRMAN BERNANKE: “[S]hould monetary policy be used to try to knock down bubbles or not? Just for the record, my view is that it can be a backup, but that the first line of defense ought to be supervision/regulation.”  

CHAIRMAN BERNANKE: “[U]nder the heading “too big to fail,” you’re going to look at that, I’m sure, in great deal. You know, why did the firms become so big? Why did they become so interconnected?”

CHAIRMAN BERNANKE: “We are, to some extent, culpable for not doing the subprime mortgage regulation.”

CHAIRMAN BERNANKE: “So financial innovation we all thought was a great thing — or maybe we didn’t think it, but most people thought it was a great thing. But it obviously had a downside, which like any other invention, it can blow up if it hasn’t been safety-tested sufficiently. And that clearly turned out to be an issue in the consumer level, for example. You know, there was a lot of — there are a lot of people who argued that subprime mortgages were a big innovation, that they allowed  people who couldn’t otherwise afford homes, to get homes; and, you know, it was a wonderful thing. So clearly, you know, people didn’t understand the vulnerability of, say, 3/27 ARMs to a downturn in house prices, for example.”

Ben S. Bernanke, July 17, 2013, Semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives, Washington D.C.

“Housing has contributed significantly to recent gains in economic activity. Home sales, house prices, and residential construction have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy. Rising housing construction and home sales are adding to job growth, and substantial increases in home prices are bolstering household finances and consumer spending while reducing the number of homeowners with underwater mortgages. Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully.”

“Quicken Pitches ARMs as Borrowers Balk at Higher Rates,” August 9, 2013, Bloomberg

“Quicken Loans Inc., the online home lender that jumped last year to No. 3 in U.S. originations, is pitching more adjustable mortgages as rising rates put an end to the refinancing boom. About 20 percent of Quicken applications are for adjustable rates, up from 5 percent earlier this year…. Nationally, rates on 30-year fixed mortgages have climbed to 4.4 percent, from a near-record low 3.35 percent in early May…. That gap is where Quicken sees an opportunity….. [T]his week [Quicken] was offering 5-year ARMs at 2.88 percent and 30-year fixed loans for 4.25 percent, according to its website. The pitch for the ARMs, which it calls “Amazing 5 Mortgages,” was anchored in the center of the lender’s home page.”

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